2021 Milliman Report
Extreme Weather Events in Europe
Executive summary
In February 2022, the Intergovernmental Panel on Climate Change (IPCC) released its latest report, confirming that climate change induced by humanity is already impacting nature and people more intensely, more frequently and over a wider geographical area than previously thought and that some effects are now unavoidable.1 Climate change continues to be evident across Europe:
- Each European country’s climate continues to warm. For example, average temperatures for the UK continue to climb with the last 30-year period (1991-2020) 0.9°C warmer than the preceding 30 years (1961-1990).2
- Winters have been getting wetter, and summers have become drier, with an increased rate of intensity and frequency over the recent years.
- Several European countries have been experiencing consecutive wind and rain storms, bringing devastating damage to many homes and businesses. The aggregated damages of consecutive storms have typically been greater than the aggregated damages for similar storms spread across the year.
- On the other hand, drier conditions have made it difficult for farmers and growers, adversely affecting the agricultural industry.
2021 was an unusual year, with extreme weather events bringing above-average claims to European insurers.
The costliest event was the July 2021 flooding in Germany, Belgium and nearby countries. This flood disaster caused up to USD 13 billion in insured losses (approximately EUR 11.5 billion as of February 2022), compared to more than USD 40 billion in economic loss (approximately EUR 35.3 billion as of February 2022), indicating a very large flood protection gap. The flooding was the costliest natural disaster for the region since 1970 and the world’s second-highest in that period, after the 2011 Thailand flood.
Further devastating secondary peril activity included severe convective storms in June, with thunderstorms, hail and tornadoes causing widespread damage to property throughout Europe. The resulting insured losses are estimated at about USD 4.5 billion (approximately EUR 3.9 billion as of February 2022). 3
New high-resolution climate models predict more frequent and severe European extreme weather events in the future. Researchers calculate that more moisture-rich, slower-moving storms will become more commonplace in the decades to come due to a warming planet.4 Another climate change-related trend shows higher levels of fire danger in Europe, longer fire seasons and intense spreading "mega fires," over which traditional firefighting means have little power.5
A multinational commitment and actions to cut greenhouse gas emissions is key to curbing climate change. Although significant progress was made at the 2021 United Nations climate conference in Glasgow, further efforts are needed to reach the international goal of limiting future warming to 1.5°C, which scientists have found will avoid or lessen some of the most catastrophic weather events.6
As climate disasters are becoming more likely and frequent, extreme weather events could have devastating economic consequences for Europe due to underestimated risks7 and insurance gaps.
Insurers and government officials are calling for higher risk awareness, including investing in protective infrastructure to limit the damage caused by future disasters and protect human lives. Economists estimate that every euro invested in climate change protection saves 15 euros in payment for climate damage.8 Additionally, governments like Germany are calling for insurance reforms to significantly increase the number of policyholders at risk-appropriate prices.9
This report focusses on the extreme weather events in 2021 (including floods and hail) that had the most impact in Austria, Belgium, France, Germany, Italy, Luxembourg, the Netherlands and the United Kingdom, and it discusses the economic costs, human loss and impact on insurers. With hundreds of fatalities, and billions of euros in damage to homes, property, vehicles and agriculture, extreme weather events in 2021 had a major impact on a society already dealing with the effects of the COVID-19 pandemic and lockdowns. For example, COVID-19-related inflation increased the price of building materials, making reconstruction of flooded homes and businesses more expensive and costing insurers even more.10
It is business-critical for European insurers to leverage their expertise and data analytics capabilities to take a leading role in managing the financial risks associated with extreme weather events and climate change. These risks can impact both sides of an insurer’s balance sheet by changing the underlying risk profile of certain insurance products and overvaluing the insurer’s assets due to unassigned risk. This paper concludes with immediate actionable steps insurers can take to manage these risks, including actively considering climate risks across the organisation, improving the assessment of future expected losses, engaging with policyholders and policy makers, and developing new insurance products and services.
Outlook for the future
The European extreme weather events in 2021 reaffirmed that the costs of climate change, both human and financial, are increasingly stark. To combat this global challenge, European Union countries and the United Kingdom have already agreed to cut their collective greenhouse gas emissions from 1990 levels by 55% by 2030, with the aim of being carbon-neutral by 2050.
The European Central Bank recently analysed three scenarios of transitioning to a zero-carbon eurozone by 2050:
- The best-case scenario is an orderly transition that meets the Paris Agreement targets and contains global warming to 1.5°C compared with the preindustrial era. Under this scenario, the average eurozone company would have slightly less profitability over the next four or five years because of the cost of complying with green policies such as carbon taxes and replacing technologies. But then the benefits of the transition would kick in. This scenario limits the disruption to our economies, businesses and livelihoods in the long run.
- The medium scenario is a disorderly transition in which countries delay taking action until 2030, and then have to make abrupt and costly policy changes to meet the Paris Agreement target of containing warming to 2°C. Under this scenario, the effects of climate change would be concentrated in certain geographical areas and sectors, and company profitability would drop more than 20% by 2050.
- The worst-case scenario is if no actions are taken to mitigate climate change before 2050 and the costs from natural disasters are extremely high. Under this scenario, the impact on gross domestic product (GDP) would be limited to 2% by 2090, but company profitability would drop by 40%. The impact would be the most severe for companies located in vulnerable geographical areas, and for banks with portfolios that are particularly concentrated in countries most affected by natural disasters.1
A heavy precipitation event that used to occur once every 10 years between 1850 and 1900 now likely occurs 1.3 times and is 6.7% wetter; under a 2°C scenario this will likely increase to 1.7 times and 14.0% wetter. An agricultural drought event that used to occur once every 10 years between 1850 and 1900 now likely occurs 1.7 times, and under a 2°C scenario will likely increase to 2.4 times.2
Generally speaking, countries in the southern European regions are more susceptible to a higher risk of extreme heat waves and wildfires, while northern European countries are more likely to see damage from floods and rising sea levels. The damage from wildfires is expected to exceed that from floods.3
In addition to reducing carbon emissions, each government needs to step up efforts to mitigate the risk of damage from extreme weather events. For example, countries should invest in flood defence systems and limit construction in areas prone to flooding. Preventive measures together with combative measures to contain global warming will help economies become resilient to future extreme weather events.
While each European country is expected to be affected by extreme weather events in the future, the impact on each is likely to vary. Learn more about your country’s future outlook by clicking on the individual country page: Austria, Belgium, France, Germany, Italy, Luxembourg, the Netherlands and the United Kingdom.
Actionable steps for insurers
European insurers and reinsurers are uniquely positioned to leverage their expertise and data analytics capabilities to manage the financial risks associated with extreme weather events and climate change. It is business-critical for insurers to take a leading role in managing these risks. Click through each of the actions below to learn about next steps insurers can take to improve resilience.
⮞ Ensure your organisation is actively considering climate risk
Climate change has been a hot topic for years and there is increased pressure for insurers to actively consider climate-related risks, with an urgency that is accelerated by regulatory and legislative changes. For example:
- The March 2021 EU Sustainable Financial Disclosure Regulation requires insurers to provide a harmonised set of environmental, social and governance (ESG) disclosures. It is likely that European (re)insurers will come under pressure from competent authorities to integrate climate change risk into the Own Risk and Solvency Assessment (ORSA) process in 2021 and 2022.1
- In December 2021, the European Insurance and Occupational Pensions Authority (EIOPA) launched a consultation on the application guidance on running climate change materiality assessment and using climate change scenarios in ORSA. Milliman published a briefing note highlighting the most important proposed guidance and its implications for insurers.2
Decision makers such as senior managers and members of the board of directors should ensure that their insurance firms are accurately assessing and mitigating climate-related risks, if they have not already done so. These efforts should span underwriting, pricing, reserving and investment.
⮞ Improve the assessment of future expected losses
With extreme weather events becoming more frequent and more severe, catastrophe models that rely on historical data may become less useful for future loss projections. Insurers could use big data and predictive analytics to generate more accurate estimates of future losses. This would support actuarial teams in estimating the reserves needed for the affected classes of business.
Appropriate pricing, underwriting rules and special terms or limits can control exposure. Underwriting and pricing teams should ensure that the proposal form includes questions that would help price extreme weather events appropriately. For example, to capture the risk of flash flooding, questions should be asked to identify basements and analyse the data against modelled flood metrics. As market techniques evolve, insurers need to maintain state-of-the art data analytics and other technologies such as artificial intelligence (AI) to avoid liability for less identifiable risks.1
⮞ Take a strategic approach to managing climate risk
Climate change can impact both sides of an insurer’s balance sheet by changing the underlying risk profile of certain insurance products and overvaluing the insurer’s assets due to unassigned climate risk. To keep pace, insurers must integrate climate risk assessment into their governance frameworks, business strategies, risk management processes and scenario analyses. This could help identify any correlating impacts across different lines of business and investments, thereby aiding decision-making processes.
Insurers need to take a strategic approach to managing climate risks, considering both current and forward-looking risks. This approach should identify actions required to manage those risks in a manner proportionate to the nature, scale and complexity of insurers’ businesses. Specifically, an insurer should:
- Integrate the consideration of climate risks into its governance structure at the group or insurer entity level.
- When making business decisions, consider the current and forward-looking impact of climate-related factors on its business using time horizons that are appropriately tailored to the insurer, its activities and the decisions being made.
- Incorporate climate risks into the insurer’s existing financial risk management, including embedding climate risks in its risk management framework and analysing the impact of climate risks on existing risk factors.
- Use scenario analysis to inform business strategies and risk assessment and identification.
- Disclose its climate risks when developing its disclosure approaches.1
⮞ Engage with policyholders and policy makers
By working with policy makers, insurers can play a key role in educating policyholders about climate-related risks. This would ensure that policyholders consider whether they have adequate protection for their needs. Education might also result in higher insurance penetration in communities and regions that need it the most.
Insurers could also look to incentivise policyholders who are proactively reducing their climate-related exposure, for example through discounted premiums or financial assistance. Some insurers might consider increasing premiums to factor in climate risk, but an increase might result in unaffordable premiums and lower take-up rates. Instead, insurers should proactively work with policy makers to adopt policies that enable a climate-resilient future. For example. in the UK, changes to Flood Re, the insurance scheme for homes at high risk of flooding, will allow insurers to help flooded households make their homes more resilient. By installing air brick covers, flood doors and flood-resistant plasterboard, homeowners will benefit from lower premiums.1
⮞ Use risk as an opportunity
Emerging risks can present new opportunities. Some large insurers are already taking advantage of climate risks and developing new climate-supportive products and services.
Parametric insurance is commonly used in agriculture as a preventive approach to natural disasters. It is more widely used to complement traditional insurance and as a tool to increase climate resilience.
⮞ Stay current with the Milliman Climate Resilience Initiative
Building on a foundation of expertise modelling complex risks, the Milliman Climate Resilience Initiative (MCRI) unites perspectives across industry, government, academic and not-for-profit sectors to anticipate and measure the most pressing climate risks and drive effective responses. Sign up to receive notifications about upcoming MCRI webinars and events, access the latest research, and explore products and services designed for climate resilience.1